Wells Fargo rides herd on DoL

Wells Fargo rides herd on DoL

It’s no coincidence that Merrill Lynch launched its new robo platform the same week it decided to exclude commission based product from IRAs. Likewise, the decision by Wells Fargo to announce a robo partnership with SigFig suggests that despite the pronouncements of pundits and industry lobbyists, DOL is hardly DOA.

It takes a brave man to guess how the Trump administration will balance populist tendencies with free market rhetoric. In this case, as I note in a previous post, the inauguration of the new president precedes DoL implementation by less than three months. The regulatory ship has left port, and in any event, it's not clear that President Trump will want to spend valuable political capital undoing DoL.

I’ll discuss Wells Fargo’s motivations in a later post. For now, I’ll note the degree to which a robo offer aligns well with the principles of transparency, low cost and accessibility at the heart of DoL. At the same time, I caution the reader to consider the challenges that any bank faces in rolling out a robo platform, a few of which I underscore in this column by Financial Planning’s Suleman Din.

New Report: Changing the Landscape of Customer Experience with Advanced Analytics

New Report: Changing the Landscape of Customer Experience with Advanced Analytics

Today’s financial consumer enjoys unprecedented information and choice, both in terms of channels and access to third party or crowdsourced opinion. Higher expectations support (and in part reflect) the skepticism that to a large degree defines the Millennial generation. These expectations underscore a fundamental shift in the power balance between the client and wealth manager, one reinforced by regulation such as the US Department of Labor conflict of interest rule

The ascendance of the client should be a call to action for wealth managers. As I discuss in a new report authored with my Celent colleagues Dan Latimore and Karlyn Carnahan, wealth management firms need to operationalize insights from new data sources, and bring servicing models up to date with their more sophisticated understanding of the client.

Campaigns and next best sales approaches that have worked in the past (or at least well enough to encourage firms to invest man hours in their design and execution) must be brought into the digital age. Too often these campaigns are a blunt hammer: they are built to sell product and ignore the evolving needs of the individual client, as well as the multiplicity of digital touch points useful to reach him or her. It is hardly surprising that the client reacts negatively to the presumption inherent in these offers.

Guidance, not advice

Guidance, not advice

Last week Merrill Lynch announced the launch of its long awaited Guided Investing robo advisory platform. Investors get access to a fully automated managed account for only $5,000, compared to the $20,000 required for call center driven Merrill Edge.

A new type of hybrid model

It’s interesting that Merrill Lynch would launch another managed account platform at this point, given the narrow gap between the two program minimums. But industry wide fee compression underscores the importance of cost savings, and with Merrill Edge’s best growth behind it, even a call center is expensive compared to a digital first approach.

I say “digital first” because Guided Investing clients can still get access to a human advisor. In this case, however, the advisor delivers (in the words of a Merrill spokesman) “guidance” and “education”, and not investment advice. Advisors are able to explain product choice as well as why and how a portfolio is rebalanced, for example. Such capabilities reinforce the Merrill message that its portfolio models are not just algo driven, but managed by the CIO.

Compliance friendly

The compliance friendly terms “guidance” and “education” give another clue to Merrill’s intentions. Like BlackRock and other asset managers discussed in my previous post, Merrill wants to get ahead of the DoL rule and fill the advice gap that will be left by the rollout of a uniform fiduciary standard across both the qualified (retirement) and taxable investment spaces. It’s worth pointing out that Merrill announced its decision to stop selling commission based IRA accounts the same week it launched Guided Investing.

Compliance and economics are powerful (and mutually reinforcing) motivations. Especially when the economics are not just about cost savings, but about the chance to develop a whole new client segment. Guided Investing represents not just another robo platform, in short, but an effort to lower delivery costs and fill out the range of options Merrill offers clients, particularly younger and self-directed ones.

Merrill believes (correctly, in my view) that this type of managed investment solution will be as ubiquitous as mutual funds within five years, and so it has no choice but to move forward. Vanguard finds itself at the same crossroads, which is why the firm’s plan to launch a fully automated robo platform (as a complement to its $40 billion AUM Personal Advisory Services hybrid program) is probably the industry’s worst kept secret.

 

A New Architecture for a New Age: Digital Transformation of IT Infrastructure in Investment Banking

A New Architecture for a New Age: Digital Transformation of IT Infrastructure in Investment Banking

Digital Transformation of IT Infrastructure

I recently wrote an article for CIOReview. A full copy of the article can be found here. In the article, I state that investment banks are transitioning their IT infrastructure to a new architecture based on a new vision: digital. The goal of digital transformation is clearly to simplify IT and operations, reduce cost, and thus improve ROE. Digital is driving demand for cloud-based infrastructure, BPO, and IT outsourcing with banks moving many applications to cloud.

But to create  A New Architecture for a New Age, the new architecture is about more than movement from analogue to digital. Emerging technologies like machine intelligence can not only drive efficiency, but also offer advanced analytics and insights leading to investing and trade ideas, superior compliance practices, improved customer engagement, additional revenue opportunities, and more.

Moving from Known to Unknown: Blockchange

To create this aggressive form of digital transformation, a new financial technology stack is coalescing around Internet of Things (IoT) and blockchain, powered by cloud. The blockchain design pattern allows for cryptographically secured environments upon which to conduct wholesale and investment banking functions.

We believe financial institutions will deploy blockchain networks with distributed ledgers in increasing numbers. Smart contracts, which are agreements whose execution is both automatable and enforceable (according to Barclay’s CTO Lee Braine) will be powered by the networks and backed by digital assets, legal templates, and standards. IT and open source organizations will provide the fabric for blockchain networks, including cloud, while a number of technology firms will deploy and manage these networks to support applications atop this fabric.

Smart contracts will be enabled by confidentiality, security, and digital identity. The underlying technology will incorporate cryptography, programmable digital assets, distributed ledger technology (DLT), and interledger protocols. Yes, getting to smart contracts requires a lot of organizational change. Fortunately, blockchain creates some first mover advantages. So it’s not just cost reduction, but actual revenue opportunities that will encourage change.

Moving Ahead

Slow to move incumbents will be uncomfortably exposed to an unforgiving environment. Some will seek partnerships with fintech firms, a kind of hedging against the future (not a bad strategy, but an incomplete one), only to become hamstrung by the next quarter's results.

A better strategy is to decide what the future industry architecture will look like and then work toward becoming a leader by offering a new model for the future. Getting to the new architecture will take a minimum of three years, but most likely closer to 4 or 5. ‘Run the bank’ still overshadows ‘change the bank’ massively. To get from a known architecture to an unknown one requires courage.

Betterment and the boldness of youth

Betterment and the boldness of youth

Shouting child businessman with retro phone. Success communication business concept

Will the $100 million investment in Betterment by VC Fund Kinnevik turn out to be a bargain, or a bust? The nine-figure sum represents a boost to flagging investment in the robo business, as well as a vote of confidence in Betterment, which has used fees as low as 15 bps and aggressive marketing to acquire more than 150,000 customers. It is worth noting that Betterment has achieved this growth with little employee turnover, hence the lack of a private or secondary market for its shares. Despite the efforts of Schwab et al to corner the automated advice market, it seems clear that there will be space for independent players, particularly those with a sound brand, innovative product strategy and a holistic view of wealth management.

There’s some irony in using old media (TV, billboards on taxis) to advertise a digital platform, but Betterment has been able to gain recognition both within the financial services industry and the broad consumer market. Part of this success has to do with being an early mover with a straightforward message. Betterment emerged from the ruins of the financial crisis offering a “better way to invest.” This meant taking the cumbersome account opening process and the need for multiple signatures completely online, while openly publishing fees. In an industry wedded to jargon, the clarity provided by Betterment and other early movers like Wealthfront meant a lot.

Another part of the story has been Betterment’s ability to build a better mousetrap. Betterment has continuously extended platform functionality (to include retirement solutions, for example), added an aggregation function, and even stepped on banks’ toes. As with clear messaging, this kind of innovation has helped Betterment stay current and avoid the slightly stale odor that increasingly permeates “Fintech”. It has also underscored the increasing maturity of a business that no longer targets just 20-somethings, but seeks the assets of older individuals with multiple investment accounts, 401k assets and plans that extend beyond the next five years.

The ability to think bold has helped the youthful firm move past competitors who have stayed small and position itself as a legitimate counterweight to the megafirms now strutting the robo stage. Kinnevik believes that a dashing brand and robust platform will help Betterment win over these less nimble and less trusted incumbents, and why not? Investor memories are short except when they are long….who after all, believes that investors have really forgotten the financial crisis?

The answer is more automation, not less

The answer is more automation, not less
The online retirement advice giant Financial Engines just published a report called The Human Touch highlighting the role of the real-life advisor in delivering client counsel. Among other things, the report found that 54% of self-guided 401(k) investors have an interest in working with an advisor. While I won’t gainsay this figure, I’m loath to extrapolate stated interest into willingness to pay. Indeed, the report acknowledges cost concerns as the primary obstacle to investor engagement. That said, it’s hard to argue with success, and Financial Engines has accrued more than $100B in assets by combining automated portfolio construction with access to a (remote but real life) advisor. Other firms, like Personal Capital, also have done well by this model. Today it’s a rare voice that will argue the appeal of the hybrid “robo-human” platform. The model speaks to the needs of contemporary investors, who are tech friendly but want to get their advice in person. The rub for firms like Financial Engine and Personal Capital is that real life advisors cost money. The advice they deliver, moreover, is not easy to scale. That’s a problem for firms whose core service—automated portfolio construction—is under increasing price pressure. To avoid commoditization, Financial Engines and other hybrid firms will need to move out the advice value chain and automate decision making around complex areas like de-accumulation and wealth transfer. A human being can still filter or tweak the advice, but automation will be the way to drive scale.

Rocking the retirement game

Rocking the retirement game
Jon Stein of Betterment is right when he notes the “poor user experiences, high costs, and a clear lack of advice” that characterize the 401(k) plan business today. These failings are particularly noticeable in the small company plan arena, as I noted in a recent blog post. Stein also is spot on that these shortcomings weigh on plan sponsors insofar as they expose these employers to fiduciary liability and weaken their attractiveness to potential new hires. The Betterment platform is a solution to a real problem, in short. That’s good news for fans of the NY-based automated advisor, which is running neck and neck in the AUM game with West Coast rival Wealthfront. The rub is that the small plan retirement space, while underserved and highly fragmented, is hardly virgin terrain. Over the last five years, a host of digital-first plan providers such as Employee Fiduciary, Capital One Investing (formerly Sharebuilder 401k) and DreamForward Financial have launched low cost, user friendly 401(k) platforms targeting small businesses. According to spokesman Joe Ziemer, the Betterment platform is well, better. That’s largely because it can deliver a full range of integrated plan services (e.g. recordkeeping) that have been developed in-house, resulting in a more seamless user experience. Unlike bolt-on retirement advice services such as managed accounts provider Financial Engines, the Betterment platform offers personalized advice (at the asset allocation level) within the plan framework. Neither the technological capabilities nor the ERISA knowledge required to build and maintain such an end-to-end platform come free, of course, and Betterment has been on a hiring binge. Leading the charge to 401(k) Valhalla has been recent addition and established ERISA consultant Amy Ouelette. The human and technical resources involved in building what Betterment terms a “full stack” platform means it is unlikely that other automated advisors will follow suit. Of the pure play robos, only Wealthfront could conceivably afford to make this kind of investment, and they’ve shown zero interest in deviating from the direct to consumer approach they’ve followed since day one. For Betterment, of course, the launch of a platform targeting small business only underscores the degree to which the firm has pivoted from B2C to the B2B game.

FutureAdvisor: stuck between a (Black)Rock and a hard place

FutureAdvisor: stuck between a (Black)Rock and a hard place
In May 2014, CNBC reporter Eric Rosenbaum concluded an interview with FutureAdvisor CEO Bo Lu with a straightforward question. “So who acquires FutureAdvisor ultimately, or who do you become?” Replied Lu: “No one acquires us. We become the next-generation financial advisor.” Insert drum roll. In fairness to Lu, the pressures that led to the acquisition by BlackRock were just starting to unfold at the time of that interview. As I note in a previous blog post, the robo advisor phenomenon has been veering from a direct to consumer model to B2B for some time. Motif, Betterment and now SigFig are all examples of firms bent on securing advisor-led distribution. How could things be otherwise? Portfolio management has been commoditized, and the significance (namely, pressure on fees) of this development weighs as heavily on the automated advisor as on the “man and his dog” RIA. The launch of Schwab’s zero fee Intelligent Portfolios was a clear sign of where pricing is heading. And with hints of a market correction as visible as the changing fall foliage, it made sense for Mr. Lu and his friends at FutureAdvisor to get out while on top. I’ll talk about the impact of this deal in my next post.

Swiss Banking 2025: The Mountains Are Not Moving, but the Walls Are Coming Down

Swiss Banking 2025: The Mountains Are Not Moving, but the Walls Are Coming Down
What will Swiss Private Banking look like 10 years from now? As the business reorients itself from secrecy toward transparency, can it remain true to core principles of discretion and personalized service? At our next client roundtable this September 22 in Zurich, Celent will look at opportunities for innovation in the face of regulatory and economic pressures, including competition from emerging offshore hubs such as Singapore. Operational forces driving automation and the hunt for liquidity in capital markets will be discussed as well. Joining us for a lively and interactive discussion will be strategy, technology and innovation leaders from European banks, brokerages and other financial institutions. While space for the roundtable is limited, I’d welcome hearing from individuals interested in the topics above and/or potentially attending.

Banks set to jump into robo

Banks set to jump into robo
In a post early last week, I talked about some of the robos who are providing automated investments services to advisors. Those robos are making inroads in the RIA world with their B2B vision, even if the blending of robo and real life remains largely untested in practice. While sales to independent advisors typically equal small change, matters are about to scale up. The launch of Schwab’s Institutional Intelligent Portfolios means the B2B model is becoming, well, institutionalized. While the platform may face some headwinds (centering mostly on resistance from Schwab advisors), it is massive and here to stay. Schwab has imprinted B2B automation on the advisory map. The banks, meanwhile, have been silent. They won’t be for long, as nearly every decent sized bank worth its wealth management salt is exploring its robo options. A passel of partnerships—and maybe even a buyout or two—is in the air, and next generation robos such as Trizic and Jemstep are egging banks into the fray. Whether these banks truly know what they are getting into is something I’ll discuss in my next post.